Coal exchange takes time to function well

China still has a long way to go in establishing a properly functioning national coal exchange as suppliers and buyers would likely continue to sell the commodity through contracts that allow for bargaining, industry experts and analysts said.

However, the approval for the establishment of a coal exchange was an encouraging sign that the country was working towards higher transparency in pricing and the possibility of futures for hedging, they said.

Earlier this month, the State Council, or cabinet, approved the establishment of a national coal exchange in Taiyuan, capital of Shanxi, using the Taiyuan Coal Trading Market as the platform.

The exchange would be operated by a shareholding company owned by producers, traders, logistics firms and users, with a plan to spend one billion yuan to build an exchange hall and a conference and exhibition centre from September, according to mainland media.

Trading volume was targeted to more than double to 500 million tonnes when the exchange is set up, from 215 million tonnes last year, according to Taiyuan Coal Trading Market general manager Ouyang Yexin.

The exchange initially will focus on spot market and cross-province trading and will be extended to futures and inter-region trading at a later stage.

The coal exchange is the central government's latest move to encourage free trading following the liberalisation of coal prices at the beginning of this year.

It comes amid increasing demand for the commodity to fuel the rapidly growing economy. China, the world's largest coal consumer, produced 8 per cent more coal at 2.32 billion tonnes last year.

The country became a net coal importer in the first four months this year as domestic supply tightened and an export tax change discouraged overseas shipments. Imports rose 50.5 per cent to 19.22 million tonnes in the first four months, while exports fell 28.6 per cent to 15.87 million tonnes.

The coal exchange would help form an integrated market and build a national pricing system - the 'China price', which was likely to affect global coal prices in future, said Zhang Genhu, general manager of the Shanxi Province Coal Transportation and Sale General Co, the promoter of the exchange.

China set up a coal exchange in Shanghai in 1992, but it was shut down 18 months later due to rampant speculation and trading irregularities.

Some analysts said the new exchange would likely have no impact on prices in the near term as suppliers and buyers preferred contracts in which prices were negotiated.

'It's a good direction that would make the prices of coal more transparent, but I do not see any real impact on the coal market as most users are buying coal directly from the producers,' said Zhang Feng, an analyst at JP Morgan.

Tao Yunpeng, manager of Huadian Power International, the listed arm of one of the mainland's top five power producers, said power firms like Huadian would buy coal directly from producers. 'We do not need an exchange to facilitate the purchases. Our volume is so big that we have bargaining power to negotiate directly with large coal producers.'

China Shenhua Energy, the listed flagship of the country's largest coal producer, also said the contract model was expected to prevail even after the exchange was established.

The lack of a public commitment from the Ministry of Railways to co-operate with the exchange was one concern, said Huang Qing, a Shenhua official.

The ministry allocates most of the national coal transportation capacity.

Transportation costs are a key element of coal prices as production comes mainly from the central and western parts of China, while demand is mainly from the eastern coastal provinces.

'For the exchange to extend to futures and nationwide trading, I expect it needs to take at least a few years,' said Mr Huang, adding that the government needed to come up with a coal price index to make trading work.

At present, the industry mostly uses Qinhuangdao on-train price and mine-mouth price in Shanxi province as a quasi benchmark of spot coal price.

The National Development and Reform Commission was setting up a thermal coal price index, which might be adopted as a nationwide price index, said Zhang Wenxian, an analyst at Guotai Junan Securities.

Still, Mr Zhang is sceptical of the new exchange's effect on the coal market. 'It might turn out that only the small producers and users would trade via the platform provided by the exchange,' he said.

Market move

The coal exchange is the latest move to encourage free trading

Expected trading volume, in tonnes, when the exchange is set up: 500m